Capital Gains Tax on Business Disposal and Reliefs

Share disposal. Alex sold shares in Epsilon Ltd for £1,000,000. Cost £100,000. Gain = £900,000.

BADR conditions. BADR (formerly entrepreneurs' relief) applies to disposals of shares in a trading company if the individual has held at least 5% of the ordinary shares and voting rights for at least 24 months, and is an employee or director of the company. Alex meets these conditions: 50% shareholding, director for 10 years. The company must be a trading company. Assume it is. Therefore, BADR applies to the share gain. The lifetime limit for BADR is £1,000,000. The gain of £900,000 is within the limit. BADR rate is 10%. Tax on share gain = £900,000 × 10% = £90,000.

Building disposal. Alex sold a commercial building for £500,000, cost £200,000. Gain = £300,000. The building was used by Epsilon Ltd, and Alex charged rent. This is a disposal of a business asset. BADR may apply to the building if it was used for the purposes of a trade carried on by Epsilon Ltd and Alex was a director. However, BADR for a building requires that the building was used for the trade of the company, and the individual must be a director or employee. Alex was a director. The building was used by the company. But BADR for associated disposals applies when the individual disposes of an asset used in the business of a company or partnership, and the disposal is associated with a withdrawal from the business. Alex sold shares and the building at the same time. The building disposal may qualify as an associated disposal. Conditions: the asset must be used in the trade of the company, and the individual must be a director or employee, and the disposal must be associated with the individual's withdrawal from the business. Alex sold his shares, so he withdrew. The building was used in the trade. Therefore, BADR applies to the building gain as an associated disposal. However, there is a restriction if the company paid rent to Alex. The BADR relief is restricted if the asset was used by the company and the individual received rent. The restriction is proportionate to the period of ownership before 6 April 2008? No, for associated disposals, if the asset was used by the company and the individual was a director, the relief is available, but if the individual received rent, the relief may be restricted. HMRC guidance: for associated disposals, if the asset was used in the business and the individual was a director, BADR is available. The fact that rent was paid does not necessarily restrict BADR, but if the rent was at a commercial rate, it may be treated as a business asset. I think BADR applies to the building gain. However, the lifetime limit is shared. The share gain used £900,000 of the £1,000,000 limit. Remaining limit = £100,000. The building gain of £300,000 exceeds the remaining limit. Therefore, only £100,000 of the building gain qualifies for BADR at 10%. The remaining £200,000 is taxed at the normal CGT rate. For 2024/25, the CGT rate for higher-rate taxpayers on residential property and carried interest is 28%, but for other gains, the rate is 20% (or 24% from 6 April 2024? The CGT rate for higher-rate taxpayers on disposals of residential property and carried interest is 28%, and for other assets, 20%. However, from 6 April 2024, the rate for residential property remains 28%, and for other assets, 20%. But there is a change: the CGT rate for higher-rate taxpayers on non-residential property and shares is 20%. The 24% rate applies to residential property. So the building is commercial, so 20%.) Wait, the CGT rates for 2024/25: for individuals, the rate on gains on residential property and carried interest is 28% (or 24% from 6 April 2024 for residential property? Actually, the 2024 Spring Budget announced a reduction in the higher rate of CGT on residential property from 28% to 24% from 6 April 2024. The rate on other assets remains 20%. So commercial building gain at 20%.

Calculation. Share gain: £900,000 × 10% = £90,000. Building gain: £300,000. BADR on £100,000 at 10% = £10,000. Remaining £200,000 at 20% = £40,000. Total CGT = £90,000 + £10,000 + £40,000 = £140,000.

Annual exempt amount. The annual exempt amount for 2024/25 is £3,000. It can be deducted from the gains. It is usually deducted from the gains that are taxed at the highest rate. Here, the gains taxed at 20% are £200,000, so deduct £3,000 from that, leaving £197,000 at 20% = £39,400. Total CGT = £90,000 + £10,000 + £39,400 = £139,400.

Conclusion. Alex's CGT liability is £139,400. He should claim BADR on the share gain and on the building gain up to the lifetime limit. He should ensure the associated disposal conditions are met. The annual exempt amount reduces the liability.

Associated disposals. BADR can apply to the disposal of an asset that is not shares in a company, if the asset was used for the purposes of a trade carried on by a company or partnership, and the disposal is associated with the individual's withdrawal from the business. The conditions are:

• the individual must be a director or employee of the company, or a partner in the partnership;
• the asset must have been used in the trade for at least 24 months before the disposal;
• the disposal must be associated with the individual's withdrawal from the business (e.g., selling shares or retiring);
• the asset must not be shares or securities. Alex was a director, the building was used in Epsilon Ltd's trade for at least 24 months (2015 to 2024), and the disposal was associated with his sale of shares (withdrawal). Therefore, the building disposal qualifies as an associated disposal. However, if the company paid rent to Alex, the relief may be restricted. The restriction applies if the asset was used by the company and the individual received rent, but the restriction is only for periods before 6 April 2008? No, the restriction for associated disposals is that if the asset was used by the company and the individual was a director, the relief is available, but if the individual received rent, the relief is restricted to the proportion of the gain that is not attributable to the rent? Actually, HMRC's guidance (HS275) states that for associated disposals, if the asset was used in the business and the individual was a director, BADR is available. If the individual received rent, the relief may be restricted if the rent was not at a commercial rate. But the legislation (TCGA 1992, s169J) restricts relief where the asset was used by the company and the individual received consideration for its use. The restriction applies to the extent that the consideration is not at a commercial rate. If the rent was at a commercial rate, no restriction. Assume commercial rent. So BADR applies. The lifetime limit is shared with the share disposal. As calculated, only £100,000 of the building gain can benefit from BADR because the share gain used £900,000 of the £1,000,000 limit.

Sale to Epsilon Ltd. If Alex sold the building to Epsilon Ltd, the disposal would be to a connected person. The gain would be calculated on the market value if the sale was not at arm's length. Alex would still be able to claim BADR if the conditions are met, but the sale to the company might be treated as a distribution or a loan? If the company buys the building, it is a purchase of a capital asset. Alex's gain is still a capital gain. However, if the company pays less than market value, the difference may be treated as a distribution. If the company pays more than market value, the excess may be a distribution. Alex should ensure the sale is at market value. BADR would still apply if the associated disposal conditions are met. However, if Alex sells the building to the company and then sells his shares, the building disposal might not be associated with the withdrawal if the company continues to use the building. The association test requires that the disposal is associated with the withdrawal. If Alex sells the building to the company, he is not withdrawing from the business in respect of the building; he is just changing the ownership. The disposal might not qualify as an associated disposal because it is not associated with a withdrawal. Therefore, BADR might not apply. Alex should be careful. The safest approach is to sell the building to a third party at the same time as the shares, as he did.